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March 2, 2023

Reopening with the justification that another director disclosed their salary in a different way is unjustifiable

Reopening with the justification that another director disclosed their salary in a different way is unjustifiable

Fact and issue of the case

The petitioner was a director of Cinepolis India Pvt. Ltd., Gurgaon and was assessed to tax in Ichalkaranji, Kolhapur. In 2007 petitioner had collaborated with the Cinepolis Group to set up Cinepolis India and had acquired certain shares and irrevocable vested rights to equity in Cinepolis India. In Financial Year (F.Y.) 2013-14, the petitioner transferred the equity shares and rights in Cinepolis India for Rs.33,55,12,980/- under a settlement agreement. The petitioner incurred an expense of Rs.1,31,87,400/- towards lawyers, Chartered Accountants, Escrow Agents etc. for the said transaction. The petitioner filed his return of income for A.Y 2014-15 on 31 st July 2014 whereby the proceeds receipt from transfer of equity shares in Cinepolis India was disclosed under the head “Capital Gains” and claimed deduction of legal expenses under the head “Cost of Improvement”, the said return was duly processed u/s. 143(1) of the Act. On 11th July 2016 a notice was issued to the petitioner u/s. 142(1) for scrutiny in exercise of power conferred u/s. 143(2) of the Act. By responses dated 23rd August 2013 and 24th August 2013, the petitioner submitted required information and documents with detailed explanation as regards the acquisition and transfer of equity shares in Cinepolis India. The Assessment Officer (AO) accepted the explanation and on being satisfied with the information and documents passed an order accepting the total income u/s. 143(3) of the Act.

By letters dated 7th April 2021, 10th April 2021 and 6th May 2021 the petitioner filed his objections inter alia on the ground that the impugned notice was issued on borrowed satisfaction of another AO was issued beyond period of four years from the completion of the regular assessment without demonstrating any failure on the part of the petitioner to disclose any material facts truly and fully. On 21 st April 2021 and 22nd April 2021, the respondent no.1 disposed of the objections of the petitioner stating that the assessee is required to be taxed under the head income from salary and should have disclosed the income under the head income from salary. With regard to the objection based on sanction for issuance of the impugned notice in terms of Section 149(1)(b) and Section 151 of the IT Act, the order stated that section 151 (1) was applicable and necessary approval of the PCIT had been taken online. The order however, failed to demonstrate any failure on the part of the petitioner to disclose material facts.

On 3rd May 2021, the PAN of the petitioner was unilaterally transferred from the jurisdiction of respondent no.1 to respondent no.2 without giving any hearing before affecting the said transfer. The petitioner was intimated about the said transfer by respondent no.1 letter dated 18th June 2021. By the said letter the petitioner also informed that the objections’ dated 26th May 2021 was pending on account of the transfer of PAN to respondent no.2. The petitioner preferred Civil Writ Petition no. 3707 of 2022 challenging the order on objection as well as the impugned notice. By an order dated 13th April 2022, this Court quashed the order on objections and remanded the matter directing the Jurisdictional Assessing Officer (JAO) to pass a reasoned order dealing with objections of the petitioner and also directed the respondent no.1 to provide the letter dated 7th March 2018, copy of the settlement agreement and appeal memorandum and the order passed by the Ld. CIT(A) in the case of Milind Saini all of which were relied upon by the respondent no.1. On 6th May 2022, the petitioner filed detailed objections having received all the documents from the respondent no.1 in Mr. Milind Saini’s case. In the said response, the petitioner raised grounds that the assessment could not be reopened beyond three years in absence of failure to disclose material facts and also challenged the unilateral from respondent No.1 to respondent no.2 without granting a hearing to the petitioner. Despite the explanation given at the personal hearing as well as detailed objections raised the respondent no.2 passed the impugned order dated 10th June 2022 holding that there was a failure on the part of the petitioner to disclose material facts and therefore, the reopening of assessment for year 2014-15 was warranted.

Observation of the court

We have no hesitation to hold that there was no failure on the part of the assessee to disclose fully and truly the material facts, nor there was any tangible material with the A.O. which would have otherwise justified the reopening of the assessment by issuing the notice impugned.

10. In the present case, the AO has not specifically mentioned in the order, what was the tangible material, to conclude that there was an escapement of income. The AO has also failed to aver what material fact the assessee has failed to disclose fully and truly. It is evident that based on the case of Milan Saini who had disclosed his income under the head ‘income from salary’ that the AO sought to reopen the case of the assessee. Apart from different heads on which the assessees’ have offered their income to be taxed i.e. there is no other ground based on which the AO is seeking to reopen. It is clearly the very same material on which a different view is being taken. The case of Phool Chand Bajrang Lal (supra) relied upon by Mr. Kumar can be differentiated on the facts, in as much as the managing director of the Calcutta company Mr. Surana had made a confession about his business activity being that of a name lender and had not advanced any loan to the assessee in that case. However, in the present case there is a full and true disclosure by the petitioner, which transaction has been accepted under the head claimed by the petitioner. Consequently, merely because another director of the same company had disclosed the income received differently, cannot be a ground for reopening and the same is evidently a change of opinion not only based on conjectures and surmises but also a case of blindly relying on information and borrowed satisfaction which is not permitted for reopening. As observed in Aroni Commercials Ltd. v DCIT-2(1)3

It is axiomatic that the law declared by this Court is binding on all authorities functioning within the jurisdiction of this Court. It is not open to the Assessing Officer to feign ignorance of the law declared by this Court and pass orders in defiance of the law laid down by this Court.

It is an imperative duty of the authorities to be updated with the law and to apply it to the case at hand before taking decisions and passing orders. Feigning ignorance of law by authorities only increases the burden of the Courts.

In view of the above, petition is allowed. The impugned notice dated 31st March 2021 and order dated 10th June 2022 are set aside with no order as to costs.


In the result, appeal of the assessee is allowed and ruled in favour of the assessee

Read the full order from here


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